Amazon (AMZN) Q1 Preview: 35X 2009E EPS = Priced For Perfection

Amazon's stock has surged toward its recent highs despite three concerns that have dogged the stock in the past few quarters:

Concern that margin expansion has peaked (driving momentum investors out of the stock).

Concern that a consumer spending slowdown will limit revenue upside.

Concern about Amazon's high multiple relative to competitors (scaring off growth investors).

The Q1 results likely won't soothe these concerns, as it's hard to see Amazon blowing out the top line in this environment. That said, Amazon's long-term growth story is intact: The company should continue to deliver strong, profitable growth, and a huge international business should cushion any blow from the US consumer.

We remain cautious on Amazon shares heading into this afternoon's 1Q results. Within the past week we believe both Google and Yahoo! have pointed to retail as a relatively weaker advertising category during 1Q. Additionally, comScore data suggests 11% non-travel e-commerce growth during the quarter, a deceleration from 19% in 4Q07 and 23% in 3Q07. Amazon North America revenue growth has come in at an average of 2.0x the comScore projected industry growth rate over the past 4 quarters. Even if comScore data is low, but directionally helpful and we assume a 15% industry growth rate, Amazon would still need to beat it by 2.2x just to meet our projection for 33% North America growth. We believe Amazon will clearly continue to take share of online retail and will be driven in North America by video games, 3rd-party, and Prime, but with sentiment and the stock improving on the heels of Google's results last week, we believe risk/reward is to the downside. Please find below key data points for Amazon ahead of 1Q08 earnings this afternoon. The webcast for the 5pm ET conference call is available at www.amazon.com/ir.

Tim Boyd, AmTech:

We expect Amazon's 1Q08 results to be
In-Line....Given the material deterioration in the U.S. consumer's
balance sheet YTD, we believe that AMZN is unlikely to post
the kind of revenue upside to which the market has become accustomed
over the last year. In addition, the fact that the Street is modeling
operating income at the high end of management's guidance range leaves
little chance of an upside surprise on the bottom-line.

We will also be paying close attention to how back-end loaded AMZN's full-year guidance is based on 2Q08 guidance. AMZN
shares remain priced for clean Beat and Raise quarters. In our view,
there is no other way to explain the valuation disconnect between AMZN
and the rest of the tech sector.

Friday's rally has created an attractive
opportunity to short the stock into the print. In our view, Friday's
rally had nothing to do with AMZN and everything to do with the
high-beta updraft created by GOOG. With that in mind, we recommend a
short position into the report on Wednesday, April 23rd. Reiterate SELL.